Civil Unions Become Law in Colorado

On March 21, 2013, Governor John Hickenlooper signed the Colorado Civil Union Act into law, which will become effective as of May 1, 2013. A civil union may be entered into by any two adults (regardless of gender), and will function as the legal Colorado equivalent of marriage. Couples wishing to enter into a civil union must go to their local clerk and recorder and file a license, and the officiant then files a civil union certificate to verify the union. Please note that a civil union will supercede any recorded beneficiary designation.

Although civil unions are not marriage (the Colorado constitution defines marriage as between a man and a woman only), all of Colorado state laws will apply to partners in a civil union as they do spouses. Partners will have the same statutory rights and responsibilities as spouses. If partners wish to end their civil union, they will have to obtain a legal dissolution of the union, and will be subject to the current laws regarding maintenance, parenting time, child support, and property division. All of the same rights at death will apply to a surviving partner. Just as with marriage, partners in a civil union may enter into an agreement to modify the rights of each partner at both death and divorce.

Despite the change in Colorado law, the federal law is currently unchanged. The federal government has the Defense of Marriage Act (DOMA), which was signed into law in 1996, and defines marriage as only between a man and a woman, and denies federal law coverage for those that have married in a state which has legalized same-sex marriage. This means that for federal law, such as income taxation, social security benefits, estate and gift rules, and federal spousal benefits, partners in a civil union will be treated as if they are both single people. On March 27th, the U.S. Supreme Court considered a case which will be decided based upon the constitutionality of DOMA. Even if the Court decides DOMA is unconsitutional, it is unclear if federal law will apply to partners in a civil union.

2013 Probate Numbers Indexed for Inflation

The 2013 numbers have been posted by the Colorado Department of Revenue: Small Estate Affidavit is $63,000; Exempt Property is $31,000; Family Allowance is $31,000; Elective Share supplemental amount is $52,000.

The Charitable IRA Rollover is back for 2012 and 2013!

The American Taxpayer Relief Act of 2012 (ATRA) enacted January 2, 2013, extended the IRA charitable rollover rules which were originally put in place in 2006, and expired at the end of 2011. This provision allows individuals who are 70 ½ or older to transfer (or "rollover") up to $100,000 per year from their IRAs to most charities if the transfer is a "qualified charitable distribution" and certain rules are followed. Not only can taxpayers use the charitable rollover for 2013 distributions, but distributions from IRAs made after November 20, 2012 and before January 31, 2013 may be treated as a charitable IRA rollover for 2012, if that distribution is made in cash to charity before January 31, 2013. Thus, you could give up to $200,000 to charity from your IRA in 2013 (with $100,000 treated as given in 2012) if you act quickly. Contact us or your IRA plan administrator to learn more.

New Tax Bill Passed!

The American Taxpayer Relief Act was passed in the first days of 2013 to avoid raising taxes on all taxpayers. The Act: (1) extends the 2012 income tax rates for persons earning less than $400,000, or $450,000 for joint filers; (2) for these same filers, the capital gains and dividends rate will increase from 15% to 20%, but stay at 15% for other taxpayers; (3) estate, gift and GST exemptions stay at $5 million (indexed for inflation) but the top rate is increased from 35% to 40%; (4) makes "permanent" the portability of a deceased spouse’s unused exemption to the surviving spouse; and (5) makes "permanent" the alternative minimum tax relief and indexes it for inflation.

IRS Nonacquiesces in Wandry

The Tax Court had held in the Wandry case (TC Memo 2012-88) that a fixed-dollar gift of an LLC interest (as opposed to a fixed percentage) was valid for gift tax purposes. This would be very helpful for taxpayers making gifts of hard to value assets. The IRS issued a notice that it will not acquiesce in this decision. AOD appearing at 2012-46 IRB. Some commentators believe this means that Treasury may issue regulations against fixed-dollar gifts, or that they have a better case in the pipeline.

Supreme Court to Review DOMA Challenge

We had earlier highlighted the Second Circuit opinion holding federal DOMA invalid and allowing the marital deduction against the federal estate tax for a same-sex widow, in Windsor, 110 AFTR 2d 2012-6370 (2012 CA2). The U.S. Supreme Court has now agreed to review this case, so we should know in 2013 whether same-sex couples who are legally married under state law are entitled to the same federal tax benefits as heterosexual married couples. Stay tuned!

Walmart to Pay Dividend in December Instead of January to Avoid Fiscal Cliff

According to an article in Reuters, the dividend that Walmart usually pays in late January will be moved up to late December, so that its shareholders will be able to have their qualified dividends taxed at the current 15% rate, instead of possibly being included in ordinary income (at a top 39.5% rate) if Congress fails to take action to avoid the "fiscal cliff." Stay tuned!

Laurie Hunter Honored by CBA/CLE in Colorado, Inc.

Laurie A. Hunter will be presented with the Richard N. Doyle CLE Award of Excellence at the Colorado Bar Association/CLE in Colorado, Inc.'s annual Reception and Wine Tasting on December 3, 2012. The Award will be presented to Laurie in honor of her dedication and outstanding contributions to CBA/CLE programs and publications. Please join us in congratulating Laurie for this wonderful recognition of her efforts!

Estate Planning and Digital Assets

The digital age has lead us to rely on computers and the internet for storage of many of our important documents and personal information. In an effort to centralize information and reduce the number of papers cluttering our lives, many have moved to digital storage. We purchase books, music, movies, etc. via internet retailers and store these purchases on our personal computers, digital devices or in the cloud. In addition, we manage our financial accounts online and have switched to paperless statements, rarely, if ever, receiving any paper communications. The question now becomes, what happens to these accounts and assets when we die. Conventional wisdom used to be that the personal representative (executor) would simply have the decedent’s mail forwarded and eventually he or she would be able to identify the decedent’s assets and creditors through the correspondence received.

Unfortunately, the ease of the digital age has created unexpected difficulty for personal representatives. How does a personal representative fully identify a decedent’s assets when he or she is not afforded access to the decedent’s online financial and email accounts? To complicate matters, the law is unclear as to whether a decedent actually owns the digital files he or she has purchased and now stores on his or her digital device, personal computer or in the cloud. Many digital content retailers provide that the consumer is simply purchasing a license to use the content, but does not actually own the property. In addition, the use of a cloud service further complicates matters, as it is uncertain as to who owns the stored content, the cloud operator or the consumer.

Further, many retailers do not have policies in place as to inheritance of use licenses, nor termination dates for those licenses. In practice, a personal representative can copy the files and transfer possession as he or she would any other personal property, in accordance with the decedent’s wishes. Transferring ownership, however, is more complicated and as of right now there is no clear answer as to how to properly effectuate the transfer.

With respect to digital accounts such as email and financial accounts, a personal representative may be able to gain access, if he or she is afforded the login and password information prior to the decedent’s death. Accessing these accounts, however, may technically be in violation of terms of service. Further, once the personal representative notifies the account provider of the decedent’s death, future access may be denied, or the account terminated and deleted altogether. Denial of access to email accounts could potentially prevent a personal representative from fully identifying the decedent’s assets and creditors.

Social media websites further complicate matters as each host is free to provide policies as to what happens at a person’s death. Facebook for example turns the decedent’s page into a living memorial in which all aspects of the page are frozen in time, with the exception of the decedent’s wall, which remains available for friends and family to post messages.

The legislature has been slow to accommodate the changing digital landscape. A few states, including Connecticut and Rhode Island have enacted legislation allowing a personal representative to access a decedent’s email account. A few other states, including Idaho, Nebraska, Oklahoma and Indiana have enacted laws allowing heirs to obtain access to digital accounts. In Colorado, the Trust & Estate Section of the Colorado Bar Association is exploring proposing legislation to address digital assets and accounts; however, a clear direction has yet to be determined to address all facets of digital media and provide personal representatives and heirs with the best solution. The main problem facing the legislature is that statutes granting a personal representative or heir with access to the decedent’s digital assets and accounts are often in conflict with the terms of service contracted between the decedent and the company holding the assets/account; thus, there is no guarantee that the company will be required to provide access.

In the meantime, it is essential that consumers plan ahead. Within the confines of the estate planning process, consumers should create an inventory of their digital assets and ensure that login and password information is readily available to assist their personal representatives and heirs with the estate administration process. Individuals may also consider including specific direction and bequests with regard to their digital assets and accounts in their Wills or other dispositive documents. While it is not clear whether a personal representative will be able to actually transfer ownership to the intended beneficiary, the company holding the asset may be more likely to assist the personal representative in transfer of the assets when there is specific direction provided in the decedent’s Will.

IRS Confirms Deductibility of Donations to Certain Charity Owned LLCs

In a long awaited pronouncement, the IRS in Notice 2012-52 confirmed what tax-exempt practitioners had expected for many years: that a donation to a single member LLC that is wholly owned by a U.S. charity, where the LLC is acting as a charitable branch or division of the U.S. charity and conducting charitable activities, are tax-deductible as if the donation were made to the U.S. charity directly. Many charities use single member LLCs to isolate its activities that may expose the parent/single member owner to increased liability. For example, real estate owned by a charity is often held in a single member LLC. However, single member LLCs are also sometimes used to expand the scope of charitable services offered or to establish charitable operations in locations outside the charity’s original service area. In these situations, the LLC is really an extension of the parent/single member charity and operates much like a branch or division of the charity. Donors often develop loyalty to and wish to donate directly to the local LLC rather than to the parent charity. For many years the IRS avoided issuing guidance on whether donations to such LLCs were deductible and as a result, conservative practitioners advised donors and charities alike that, to be assured of a deduction, donations had to be made directly to the charity that was exempt under Section 501(c)(3) rather than through any single member LLC, even where the LLC was wholly owned and operated by the charity. With the issuance of this Notice, however, donations can be made directly to the LLC, as a gift to a branch or division of the charity, provided the LLC satisfies the other requirements of deductibility for charities (i.e., it is organized and operated in the U.S., it is organized and operated exclusively for charitable purposes, there is no private inurement of the earnings and it satisfies the lobbying and political campaign restrictions for 501(c)(3) organizations). The Notice states that the U.S. charity is the donee for substantiation and disclosure purposes, and the IRS encourages the charity to disclose in the acknowledgment or another statement that the LLC is wholly owned by the U.S. charity and treated by the charity as a disregarded entity (that is, the charity reports all of the LLC’s activities on its information return and does not treat it as a separate taxpayer). The Notice is effective for contributions made on or after July 31, 2012, but can also be relied on by taxpayers for prior taxable years where the statute of limitations has not yet expired (that is for prior year gifts).